Greek central bank issues 'Grexit' warning if aid talks fail

[June 17, 2015] By George Georgiopoulos and Matthias Williams 

ATHENS (Reuters) - The Greek central bank warned on Wednesday that the country would be put on a "painful course" towards default and exiting the euro zone if the government and its international creditors failed to reach an agreement on an aid-for-reforms deal.

It also said Greece risked a renewed bout of recession and predicted that the current economic slowdown would accelerate in the second quarter of this year. The Greek economy had started growing again last year after being pounded by years of austerity, but fell back into negative growth in the first quarter of 2015, contracting by 0.2 percent year-on-year.

The ongoing crisis has prompted an outflow of deposits of about 30 billion euros ($33.84 billion) from Greek lenders between October and April, the central bank said.

Time is fast running out for Athens and its creditors to reach a deal before a 1.6 billion euro repayment by Greece to the International Monetary Fund falls due at the end of the month. But neither side appears willing to give ground, with Greek Prime Minister Alexis Tsipras accusing the creditors of trying to "humiliate" his country by demanding more cuts.

Despite the heated rhetoric, the central bank said that the two sides appeared to have reached a compromise on the main conditions attached to an aid agreement, and that little ground remained to be covered for a deal to stick.

"Failure to reach an agreement would ... mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country's exit from the euro area and, most likely, from the European Union," the Bank of Greece said in a monetary policy report.

"Striking an agreement with our partners is a historical imperative that we cannot afford to ignore."

Austrian Chancellor Werner Faymann, who has taken a relatively lenient line with Greece, was in Athens on Wednesday in a last-ditch bid to end the standoff.

The Greek central bank urged the European Union to spell out promises of debt relief to Greece - a key demand from Athens - in greater detail.

"An agreement would allow Greece to benefit from the favorable global environment and the ECB's quantitative easing program," the report said.

"Our top priority right now should be to create, as soon as possible, those conditions that would enable the Greek economy to benefit from the favorable global economic environment and the highly accommodative monetary policy at the euro area level and speed up a sustainable return to global capital markets."

($1 = 0.8866 euros)

(Editing by Peter Graff)

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